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Luis de Guindos, Spain’s finance minister, said uncertainty over the political outlook in Italy could spread to Madrid.

‘Every time there are doubts, for example today in the case of Italy,
when there are uncertainties about the political stability of a
neighbouring country such as Italy, that immediately affects us,’ he
said.

German foreign minister Guido Westerwelle said any move to water down
the reforms imposed by Monti ‘would bring new turmoil not only to Italy
but also to Europe’.

Italy’s 10-year bond yield – the amount the government pays to borrow –
hit a two week high above 4.8 per cent while the Spanish yield rose to
5.6 per cent.

Bank shares across Europe were also on the slide and the Italian stock market fell 2.2 per cent.

Jane Foley, a currency strategist at
Rabobank, said: ‘The resignation has re-awakened fears of a return to
old style political theatre in the country.’

The Italian economy is trapped in its
fourth recession for 10 years and has barely grown over the last
decade.
The Organisation for Economic Cooperation and Development warned it
faces another year of decline in 2013 – with GDP down 1 per cent
following a 2.2 per cent in 2012.

National debt – the largest in Europe
– is set to top 130 per cent of GDP in the coming years as the country
struggles to get a grip of the public finances.

Monti was appointed last year to
replace Berlusconi.
He had planned to serve until April 2013 but decided to stand down early
after Berlusconi’s party last week withdrew its support for the
unelected government.